Labour Matching Models

Labour matching models stem from the fact that when a worker becomes unemployed, he needs to look for a job and such a process is not instantaneous. He cannot simply occupy any vacancy, but has to search for a job in a certain area, in a certain profession and which matches a list of criteria such as wage, hours of work and subjective factors like “would I enjoy working here”. This all takes time and requires effort. Before such matching models were devised, economists assumed in their models that unemployment could instead be modelled by looking at the number of unemployed and the number of vacancies and then working out how many of the unemployed could take these vacancies. This ignores the time required to find a job and the fact that the unemployed can only do certain jobs (a fireman cannot fill the role of a rocket scientist; at least not without retraining) and work in certain areas. It also requires some effort on behalf of the unemployed person to go out and look for a job and on behalf of the firm with vacancies posting about such vacancies in the necessary places.

Recently, a paper by economists at the Bank of England (Turrell et al., paper can be found here) have examined the relationship between mismatch in the labour markets and the UK’s Productivity Puzzle. A brief summary of this Productivity Puzzle is that since the Financial Crisis, productivity (the amount each worker produces) in the UK has stagnated and not recovered to pre-crisis trends. This stagnation has not been noticed in other comparable countries and the exact reason why the UK has not recovered is unknown.

These authors look at barriers which prevent labour mobility between regions and occupations which can lead to misallocation of labour and result in lower productivity. For example, if there are many vacancies for productive jobs in London, but the unemployed are instead concentrated in Manchester, then the productive London jobs will not get filled, and so aggregate productivity will remain depressed. Similarly, if there are many productive vacancies in a certain field, say, for hypothetical purposes, factory workers, but all the unemployed are trained to be accountants, then again productivity will remain depressed.

The authors of this paper found that had the most productive vacancies by occupation be filled (i.e. if we could pretend that all accountants were actually factory workers who could then fill these vacant positions) then this would only have resulted in a minor increase in output and productivity growth since the Financial Crisis.

In other words, occupation mismatch can do little to resolve the effects of the Productivity Puzzle. This suggests that if the government wanted to boost productivity then it does not need to focus too heavily on occupational retraining 1.

Instead, they find very strong effects of regional mismatch. They find that resolving regional mismatch between 2008 and 2015 would have significantly increased UK output and productivity, enough to have completely offset the UK’s productivity puzzle. That is, if people were able to move easily between regions (so unemployed workers in Manchester could fill productive vacancies in London) then productivity would have increased substantially. The regional mismatch occurs because there remains unfilled productive vacancies in London and the South East.

This implies that the government should focus its efforts on policies to either lower barriers to movement across regions or equalise productivity across regions. In the first case, this involves policies to promote people moving, such as financial assistance. In the second case, this involves moving productive jobs in London to the places where there are large numbers of unemployed. This is not any easy task, and may involve a Big Push effect to decentralise economic activity away from the South.

They also find that the highest matching efficiency (jobs which get filled the quickest) level is for elementary occupations, whilst the lowest is for managers, directors and senior officials. Those that are unemployed in the managerial occupation, tend to take 3 times as long to find new work than those in elementary occupations, with managers estimated to be 2/3 more productive than elementary workers. Hence, it would be very damaging for UK productivity if there was a shock which resulted in high unemployment in the managerial occupation sector.

Furthermore, lower matching efficiency occurs in more productive occupations, such that it takes longer for unemployed individuals to be matched with productive jobs. This is a fundamental problem, as matching efficiency tends to fall with increasing skill level whilst productivity tends to rise with increasing skill level 2.

Note that the paper is not arguing that regional mismatch is behind the Productivity Puzzle itself. Just that by eliminating regional mismatch we could see productivity gains which would offset stagnant productivity. Obviously, this means that if we can identify the root cause of the Productivity Puzzle, then also addressing regional mismatch would substantially boost UK productivity.

1 This is not to say that training itself would not affect productivity. Simply that retraining accountants to be factory workers would not boost overall productivity by much.2 It makes sense that productivity increases with skill/education. We can also understand why matching efficiency tends to fall with skill level by considering that there are often fewer jobs that the more educated can do, and they tend to be more niche. So a highly educated academic economist might not be able to occupy any academic economist role, but instead must match with a vacancy for a particular niche, such as a labour market economist role.